The propagation of financial turbulence: interdependence, spillovers, and direct and indirect effects

Zhongbo Jing, J.Paul Elhorst, Jan Jacobs and Jakob Haan
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Zhongbo Jing: Central University of Finance & Economics
Jakob Haan: University of Groningen

Empirical Economics, 2018, vol. 55, issue 1, No 9, 169-192

Abstract: Abstract We investigate the propagation of financial turbulence via trade, capital flows, and distance channels in the pre-crisis and Global Financial Crisis periods by modeling spillover and interdependence effects, using spatial econometric techniques. Financial turbulence is proxied by the ratio of nonperforming loans to total loans in a country. Spillover effects are defined as significant changes in the linkages between countries due to a shock, and interdependence effects as strong linkages among pairs of countries independent of shocks. Using annual data of 40 countries from 2003 to 2010, we find that interdependence and spillover effects should be jointly analyzed. Furthermore, our results suggest that the capital flows channel is more important than the other two channels in capturing propagation of financial turbulence. By deriving what is known in the spatial econometrics literature as direct and indirect effect estimates, we show that the marginal effects of macroeconomic variables (like GDP growth, inflation, and credit growth) on financial turbulence take different forms during a crisis than in tranquil periods.

Keywords: Financial turbulence; Interdependence; Spillover effects; Spatial panel econometrics (search for similar items in EconPapers)
JEL-codes: C23 F30 G21 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (11)

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DOI: 10.1007/s00181-017-1249-y

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